Air India plans to restrict competition on global routes to bounce back to profit

By TBM Staff | Mumbai

According to a turnaround plan prepared by SBI Caps and vetted by Deloitte Touche Tohmatsu India (DTTIPL), the government will not enter into any bilateral agreements with foreign carriers till 2014-2015, the period when the loss-making national carrier, Air India, hopes to turnaround and report profits. This is one of the key assumptions in the plan for the airline to gain market share in the international sector. The airline has projected the Middle-East, South-East Asia and Western Europe to contribute around 80 per cent of its international passenger traffic over 2010-2015.

According to a report in The Indian Express, the success of the plan largely depends on restricting competition for the carrier in the international arena by allowing it to continue exercising the Right of First Refusal (RoFR) on utilisation of Indian bilatcrals with various countries. This means that other domestic airlines will be able to operate foreign routes only if Air India refuses. Further, until the ailing airline utilises a significant portion of its target bilatcrals adding more capacity to or from India will not be allowed for other airlines. This assurance, as per the review, was given by Praful Patel, former Civil Aviation Minister, in a meeting held in January, 2011.

The report laid out that any change in the assumptions which is "an important input," may lead to a lower passenger growth rate for the carrier. As of now, the airline under-utilises its designated flying quota on three international routes — Middle East, South-East Asia and Western Europe. Under the plan, the airline has said that it intends to offer 9.83 million seats in the Middle-East and 2.71 million in the South-East Asia region by 2014-15. DTTTPL has said in its review that the airline may be able to achieve its targets in these regions "benefitting from the capped growth of competing airlines." But this may not be the case in Western Europe as foreign airlines may add capacity giving the carrier stiff competition.

The review-report noted the airline's competitors like Jet Airways and Kingfisher Airlines may be constrained to their existing capacities, and could be unable to cater to the growing markets. On the domestic front, Air India has said it will enhance its market share from 17 per cent in November 2010 to 21 per cent in 2014-15, with a Passenger Load Factor of 75 per cent. 'The growth in domestic traffic targeted by Air India, is higher than the overall market growth rate of 12-13 per cent," noted DTTIPL. The review has termed these projections "ambitious” and reflecting the "best case scenario." The airline is already in middle of negotiating with bankers for conversion of debt into equity, but so far, banks have shown reluctance.

While the airline's total staff costs, as per the review, may come down by 51 percent in 2011-12 - as half of them get absorbed in its subsidiaries - they are likely to rise after 2011-12. DTTIPL has noted that a smooth staff transfer to its subsidiaries may be "challenging" given the involvement of employees' unions and the negotiations required to freeze terms of transfer and employment in the new entity.